Chapter 5 Notes on Fraud and Internal Control

A collection of flashcards summarizing key concepts related to fraud, internal control objectives, and principles of control activities from the lecture notes.

Fraud

An attempt to deceive others for personal gain.

Corruption

Misusing one’s position for personal gain.

Asset misappropriation

The theft or embezzlement of assets, often cash; the most common type of fraud but least costly overall.

Financial statement fraud

Misreporting amounts in financial statements; the least common type but most costly overall.

Fraud Triangle

A model explaining the three factors that contribute to fraud: incentive, opportunity, and rationalization.

Incentive (in Fraud Triangle)

The pressure or motivation for the employee to commit fraud, such as personal benefit or job security.

Opportunity (in Fraud Triangle)

The chance to commit fraud, often due to weak internal controls.

Rationalization (in Fraud Triangle)

The mindset that allows an employee to justify their fraudulent behavior as acceptable.

Internal Control

Actions taken by individuals within an organization to achieve operational, reporting, and compliance objectives.

Control Environment

The overall attitude of the organization, influenced by upper management’s policies and commitment to integrity.

Risk Assessment

The process of identifying and analyzing risks to the organization's objectives, especially those related to fraud.

Control Activities

The policies and procedures implemented to mitigate risks and achieve control objectives.

Principles of Control Activities

Fundamental ideas that support control objectives, including the establishment of responsibility, segregation of duties, restricted access, documentation, and independent verification.

Deposits in Transit (DIT)

Deposits that have been recorded in the company’s books but are not yet reflected in the bank statement.

Outstanding Checks (O/S checks)

Checks issued by the company that have been recorded but not yet cleared by the bank.

Non-Sufficient Funds (NSF)

Checks that the company received from customers that have bounced.